THE ZERO BOUND IN AN OPEN ECONOMY: A FOOLPROOF WAY OF ESCAPING FROM A LIQUIDITY TRAP by
نویسنده
چکیده
The paper examines the transmission mechanism of monetary policy in an open economy with and without a binding zero bound on nominal interest rates. In particular, a foolproof way of escaping from a liquidity trap is suggested, consisting of a price-level target path, a devaluation of the currency and a temporary exchange rate peg, which is later abandoned in favor of price-level or in‡ation targeting when the price-level target has been reached. This will jump-start the economy and escape de‡ation by a real depreciation of the domestic currency, a lower long real interest rate, and increased in‡ation expectations. The abandonment of the exchange-rate peg and the shift to price-level or in‡ation targeting will avoid the risk of overheating. Some conclusions for Japan are included. JEL Classi...cation: E52, F31, F33, F41
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